Saturday, January 31, 2009

All Cylinders

Lately I've felt like the store is firing on all cylinders, like we have what I initially envisioned as a successful game store. This took four years and required a near complete collapse of my local competition -- and it could change at any moment. Still, is it a successful business? Are any game stores successful in business terms? Are game stores "lifestyle" businesses? Is there any hope that they could make money in a reasonable fashion?

First, let's look at what's reasonable in the realm of the real world. A reasonable business plan, in which regular people would want to invest money, would show a return on investment in no less than five years, maybe seven if it was more ambitious. For example, if you spent $100,000 building your game store, which I think is a minimum to be taken seriously, you would need to first break even, meaning you stopped hemorrhaging cash, and then payed out $100,000 back to your investors within five to seven years. Most businesses fail in the first year, but survivors generally break even somewhere in the second year, and hopefully get that return on investment by their plan date. By the way, the dirty secret of small business is that the failure rate doesn't improve over time. Year four is just as hard and failure prone as year fourteen.

For a game store, the model would work something like this: Your $100,000 investment would include $60,000 in inventory. The rest went to start up costs and losses. That $60,000 in inventory is likely to turn at best, four times for annual sales of $240,000, which seems to be a realistic average for the industry. You do really, really well and get that turn rate in year three and accrue no debt over this time. Of your gross sales, the rule of thumb is about 8% of that is likely to be profit; lets call it $20,000. So after breaking even, it takes five years to pay back investors, for a total of 7 years. Voila! Then it's just profit and blue skies for years 8 and on. Good plan, right? Business plans are always about blue skies.

If it was that easy, everyone would be doing it and investment in retail stores would be the next bubble. I think most stores struggle to survive and that 8% net profit number is bogus. I think it's more like 1-2%, meaning your return on investment is ridiculously far down the road unless you create revenue streams beyond the brick and mortar store: conventions, online sales, community tie ins, or a side business for your hobby business. A 2% return is a 20 year pay back and any business owner with a functional brain will accept their new lifestyle, close their business or seek out additional revenue streams.

Perhaps the best solution is acceptance. Promote game stores as lifestyle businesses, with current owners being the caretaker of the business until his lifestyle choice changes. Nobody really talks about this when new owners contemplate the numbers. I think they should be told all the likely possibilities, with failure being most likely, and a very slow return as the second most likely outcome. I think a game store is a great retirement business, or business for a couple looking for a second income. It's no way to raise a family as a single income source.

If you had a caretaker model, the game store would be something that was expected to be handed down to the next owner over time, while most stores nowadays simply get liquidated when the owner has had enough. The problem is this would require a kind of franchise plan to standardize such a business, and who wants to buy or create a franchise with a 20 year return on investment? However, the plan is where the value lies, while a store without a plan facing closure is worth maybe 10% of their stock at best. That $100,000 investment is now worth $6,000.

The bottom line is there is no one type of game store or one way of building one. Small business is about the individual and returns on investment are based on many factors and opportunities. A clever owner or one in a unique set of circumstances might make profits far above these projections. At the same time, all the ingenuity in the world can be cut short by an eminent domain plan by the city or a national crisis that kills consumer spending. Brilliant people have failed businesses and complete morons can get lucky. That's part of the excitement!


  1. So it's all just a game to you?

    Most expensive game ever! More expensive than a GW addiction!

  2. If you're not having fun, there's not a compelling reason to continue doing it.